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Last week, we started to discuss how it was impossible to identify whether a low price was a “predatory” price. We continue in this post to work our way through Demsetz’s paper.

Another way to potentially identify predatory behavior is not to look at prices, but rather to look at how firms’ output levels change as new entrants threaten to, and actually, enter the market. Proponents of this view then see it as the role of public policymakers to restrict how much these incumbent firms could produce for some specified period of time (gosh, what a Hayekian nightmare).

But here, too, just as in the case of observing prices, it is impossible to tell when a firm expands output it does so for predatory reasons or for competitive survival reasons. Today, Apple is essentially the only firm selling the iPad, for about $500.  Suppose next year 10 new competitors bring their tablets to market (I fully expect to see this). This would have the effect of lowering the long-run competitive market price. This will encourage Apple to increase iPad production because although the new market price is lower, it is still likely much higher than the marginal cost of the production of the iPad (I need to show pictures here, but I refuse). In the long run however, price declines will force Apple to reduce output to below what he was producing when he was a monopolist, unless Apple can achieve major economies of scale in producing their tablet. Policy makers therefore could only determine that the expansion of output by Apple was predatory if they knew two things: first, that there were no economies of scale to be enjoyed by Apple, and that the price of the product was already at its new equilibrium (and not on its way down further). Good luck.

Next up, Demsetz offers up a legal test for observing whether behavior by one firm is predatory. It’s my favorite of all.

2 Responses to “More on Predatory Pricing”

  1. Harry says:

    Apple could have all sorts of reasons for pricing the Ipad, and for all we know it could have been settled by the Apple marketing guys averaging scores on some dart board, after much discussion of how to design the board. In any event, I bet they had no interest in hiring a Policy Maker to perfect their decision. Since the IPad is just a big IPhone, who cares whether a few marketing guys have wolf attitudes?

    I look forward to your explication of The Legal Test.

    Question: Will Government Motors do a better job pricing the Volt than the Policy Makers did with the Yugo and the Lada? How does one determine whether those prices are/were not predatory?

  2. […] We’ve been studying Harold Demsetz’s terrific paper, “Barriers to Entry,” slowly over the past few weeks. We’ve already analyzed what it might possible mean to say that a firm’s practices are predatory, and we have discussed how difficult it would be to identify using a purely economics approach. Today we’ll discuss a legal test as proposed by Demsetz.This legal test plays to the difference between analytic reasoning (which we have been doing) and social reasoning (which we are about to attempt). Readers may find Demsetz’s discussion richer upon reading Arnold Kling’s piece on Why People Hate Economics. […]

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